Samsung reports record profit as Galaxy shipments lead iPhone

Samsung profits

Lee Jin-man/The Associated Press

Visitors walk by the billboard of Samsung Electronics's Galaxy Note II at a showroom of its headquarters in Seoul, South Korea, Friday. Samsung's third-quarter net profit nearly doubled over a year earlier to a record high propelled by strong sales of Galaxy phones that helped widen its lead over rivals.

Net income in the three months ended Sept. 30 rose 91 percent to 6.56 trillion won ($6 billion), the Suwon, South Korea-based company said in a statement Friday. That compares with the 6.25 trillion-won average of 27 analyst estimates compiled by Bloomberg.

Operating profit from telecommunications more than doubled as Samsung’s Galaxy devices widened their lead over Apple’s iPhone. Samsung shares dropped amid concern growth in smartphone demand may have peaked after Apple reported earnings that missed estimates and Microsoft Corp. released its Surface tablet, escalating competition for mobile devices.

“The problem is the worry about the smartphone market peaking,” said Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management. “The question is whether tablets can offset the peak in the smartphone market, but it might take some time. Apple’s results refueled these concerns.”

Samsung fell 2.7 percent, the most in two weeks, to 1,287,000 won at the close of Seoul trading, paring gains this year to 22 percent. South Korea’s benchmark Kospi index declined 1.7 percent.

Competition probably will increase in the fourth quarter amid a global economic slowdown, Samsung said Friday. The company will focus on high-value products to maintain its momentum and will try to boost sales of tablet computers with more pen-equipped models and cheaper devices, Samsung said.

“We plan to make tablets our new growth engine,” the company said.

Apple’s share of the global tablet market fell to 57 percent in the third quarter from 65 percent a year earlier, losing sales to devices running Google’s Android software, according to Strategy Analytics.

Samsung’s operating profit surged 91 percent to 8.12 trillion won from 4.25 trillion won the year before. Sales rose to 52.18 trillion won, equivalent to 19 percent of South Korea’s gross domestic product, from 41.27 trillion won a year earlier.

More than two-thirds of the earnings were generated by the telecommunications business, where operating profit jumped to 5.63 trillion won from 2.42 trillion won, the company said in the statement. That compared with the 5.42 trillion-won median of four analyst estimates compiled by Bloomberg News. Sales at the unit rose to 29.92 trillion won from 17.94 trillion won.

“The mobile-phone number came out very strong,” Kim Young Chan, a Seoul-based analyst at Shinhan Investment Corp., said by phone Friday. “It again confirms that there’s no real competitor out there other than Apple. The Samsung-Apple duopoly will likely continue for a while.”

Samsung shipped 56.9 million smartphones in the third quarter, giving it a record 35 percent market share, compared with 17 percent for Apple, Strategy Analytics said Friday. In overall handset sales, including basic types, Samsung remained the top seller, researcher IDC said separately.

Sales of the Galaxy S III surpassed 20 million units in the 100 days after its May debut, Samsung said Sept. 6. The company also is offering the Galaxy Note II phone, equipped with a pen and a larger screen than the S III, after the first version sold more than 10 million units.

Samsung’s earnings from phone sales will probably decrease in the fourth quarter, compared with the previous three-month period, as the company increases spending on marketing to maintain its sales lead, Kim said.

Apple, lagging behind only Samsung in the $219 billion global smartphone market, started selling the iPhone 5 with a bigger screen, lightweight body design and faster processor than previous models last month. On Oct. 23, the company unveiled a smaller, cheaper version of the iPad.

Cupertino, Calif.-based Apple reported debut weekend sales of more than 5 million units for the iPhone 5, falling short of some analyst estimates after supply constraints delayed shipments. Apple forecast profit Thursday that fell short of analyst predictions because of rising costs to revamp product lines.

LG Electronics and other rivals using Android are flooding the market with high-performance devices and pushing down prices, Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management, said Friday.

“Chances are smartphone profit will go down from here,” Im said. “It’s getting harder to differentiate with hardware, and average prices are falling.”

Samsung and Apple also are battling in court over patents protecting their devices, with each accusing the other of copying their intellectual property.

The companies have traded victories, with Apple winning more than $1 billion in damages Aug. 24 after a jury in San Jose, Calif., ruled that the South Korean company infringed six of seven patents. Apple is seeking a U.S. ban on some Galaxy products.

Separately, a British court ruled that Samsung’s Galaxy tablets weren’t “cool” enough to be confused with the iPad. Apple’s appeal was rejected, and the company had to post the ruling on its British website.

Samsung is also the biggest maker of computer-memory chips. Profit at the semiconductor division fell to 1.15 trillion won from 1.59 trillion won amid a decline in global personal- computer demand. The four analysts surveyed by Bloomberg News estimated a median profit of 1.16 trillion won.

The price of the benchmark DDR3 2-gigabit DRAM averaged 84 cents in the July-September period, compared with $1.08 a year earlier, according to data from Taipei-based DRAMeXchange, operator of Asia’s largest spot market for semiconductors.

During the period, global PC shipments fell 8.3 percent from a year earlier to 87.5 million, according to Gartner. IDC reported an 8.6 percent decline.

As DRAM demand slumps, Samsung is accelerating its diversification to more profitable products used in mobile devices. The company, the biggest semiconductor supplier for Apple and the exclusive manufacturer of processors powering the iPhone, said in August it will invest about $4 billion in its Texas factory to boost output of the chips in smartphones and tablet computers.

Samsung’s display business had an operating profit of 1.09 trillion won, compared with a loss of 90 billion won a year earlier. The median of the four analyst estimates was a profit of 909 billion won.

The company is benefiting from demand for displays used in mobile devices as sales of flat-screen TVs stagnate. Sales of mid- to small-sized screens probably accounted for about 60 percent of operating profit at the display business, according to estimates by Hanwha Investment & Securities Co.

The TV business had an operating profit of 430 billion won, up from 310 billion won a year earlier. Sales were 11.6 trillion won, compared with 11.4 trillion won a year earlier, the company said.

Samsung is introducing new technologies including OLED, 3-D and Internet-enabled TVs to reverse slowing industry sales. The sets using OLED, or organic light-emitting diode, technology can produce sharper and brighter images than current liquid-crystal- display models.